Vertical Structure and the Risk of Rent Extraction in the Electricity Industry

Anette Boom*, Stefan Buehler

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

This paper studies how competition and vertical structure jointly determine generating capacities, retail prices, and welfare in the electricity industry. Analyzing a model in which demand is uncertain and retailers must commit to retail prices before they buy electricity in the wholesale market, we show that welfare is highest if competition in generation and retailing is combined with vertical separation. Vertically integrated generators choose excessively high retail prices and capacities to avoid rent extraction in the wholesale market when their retail demand exceeds their capacity. Vertical separation eliminates the risk of rent extraction and yields lower retail prices.
Original languageEnglish
JournalJournal of Economics & Management Strategy
Volume29
Issue number1
Pages (from-to)210-237
Number of pages28
ISSN1058-6407
DOIs
Publication statusPublished - Jan 2020

Bibliographical note

Published online: 30. August 2019

Keywords

  • Competition
  • Electricity
  • Generating capacities
  • Monopoly
  • Vertical integration

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